Saving for the FutureSaving for the Future

Chapter 10Chapter 10

Lesson 10.1 Lesson 10.1

Savings Goals and Institutions Savings Goals and Institutions

I.I. Why You Should Save Why You Should Save

A.A. To provide for future needs, both To provide for future needs, both expected and unexpectedexpected and unexpected

B.B. Short-Term Needs--savingsShort-Term Needs--savings1.1. Emergencies—unemployment, Emergencies—unemployment, sickness, sickness, accident, death in the familyaccident, death in the family2.2. Vacations—short weekend trips or Vacations—short weekend trips or longerlonger3.3. Social Events—weddings, family Social Events—weddings, family gatherings, sports eventsgatherings, sports events4.4. Major Purchases—car, appliances, Major Purchases—car, appliances, furniture, remodeling.furniture, remodeling.

C.C. Long-Term Needs--Long-Term Needs--investmentsinvestments

1.1. Home Ownership—down payment, closing Home Ownership—down payment, closing costscosts

2.2. Education—pays off in higher income Education—pays off in higher income potential; for yourself or childrenpotential; for yourself or children

3.3. Retirement—Social Security only a Retirement—Social Security only a supplement to retirement savings.supplement to retirement savings.

4.4. Investing—Invest savings above covering Investing—Invest savings above covering daily expenses and emergencies. Invest in daily expenses and emergencies. Invest in stocks, bonds, mutual funds, real estate, to stocks, bonds, mutual funds, real estate, to make your money grow faster. Can be risky.make your money grow faster. Can be risky.

D.D. Financial Security Financial Security1. 1. Save for peace of mind—don’t have to Save for peace of mind—don’t have to

worry about how to pay when needs worry about how to pay when needs arise arise

2.2. How much can you save? Depends on How much can you save? Depends on

a.a. Discretionary income—what you have Discretionary income—what you have left over after bills are paidleft over after bills are paid

b. b. Importance of saving to youImportance of saving to you

c.c. Your anticipated needs and wantsYour anticipated needs and wants

d.d. Your will power, or ability to give up Your will power, or ability to give up present spending to provide for your present spending to provide for your futurefuture

II.II. How Your Money How Your Money GrowsGrows

A.A. Principal—Principal—the amount of money the amount of money depositeddeposited

B.B. Interest—Interest—amount the financial amount the financial institution pays the saver for use institution pays the saver for use of his/her moneyof his/her money

C.C. Compound InterestCompound Interest—interest —interest computed on the original principal computed on the original principal plus accumulated interestplus accumulated interest

Interest Compounded Interest Compounded Annually Annually

Year Beg Balance Interest Earned (5%) Ending Balance

1 $100.00 $5.00 $105.00

2 105.00 5.25 110.25

3 110.25 5.51 115.76

D. The more often interest is compounded, the greater your earnings

E.E. Many financial institutions use Many financial institutions use computers to compound daily computers to compound daily interestinterest

F.F. Rate of Return (Yield)—Rate of Return (Yield)—the the percentage of increase in the value percentage of increase in the value of your savings due to interestof your savings due to interest

G.G. Law requires all finan.Law requires all finan. institutions to institutions to tell consumers tell consumers annual percentage annual percentage yield (APY) yield (APY) so you can compare so you can compare yields on different accountsyields on different accounts

III.III. Where You Can SaveWhere You Can Save

A.A. Commercial BanksCommercial Banks

1.1. Widest variety of banking Widest variety of banking servicesservices

2.2. Insured by FDIC, protects Insured by FDIC, protects depositors from bank failure up depositors from bank failure up to to $100,000 per account$100,000 per account

B.B. Savings Banks (Mutual Savings Savings Banks (Mutual Savings Banks)—only 500 in Northeast USBanks)—only 500 in Northeast US1.1. Savings AccountsSavings Accounts2.2. Loans on Real property--Insured Loans on Real property--Insured by by FDICFDIC

C.C. Savings and Loan Associations Savings and Loan Associations (S&Ls)(S&Ls)1.1. Primary--Lend money for home Primary--Lend money for home mortgagesmortgages2.2. Checking and savings accts--Checking and savings accts--Insured by FDICInsured by FDIC

D.D. Credit UnionsCredit Unions

1.1. Not-for-profit organizations for Not-for-profit organizations for members of employee groupsmembers of employee groups

2.2. Higher interest rates on savings, Higher interest rates on savings, and lower rates on loansand lower rates on loans

3.3. NCUA insures accountsNCUA insures accounts

4.4. Owned by members—savings Owned by members—savings account called share accountaccount called share account

E.E. Brokerage FirmsBrokerage Firms

1.1. Buy and sell different types of Buy and sell different types of securities—stocks and bonds issued by securities—stocks and bonds issued by corporations or the governmentcorporations or the government

2.2. Stocks represent ownership Stocks represent ownership

3.3. Bonds represent debt, or a loanBonds represent debt, or a loan

4.4. Investors buy and sell securities Investors buy and sell securities through a stockbroker, who works for a through a stockbroker, who works for a brokerage firmbrokerage firm

Lesson 10.2 Lesson 10.2

Savings Options, Features, and Plans Savings Options, Features, and Plans

I.I. Savings OptionsSavings Options

A.A. Regular savings accountRegular savings account

1.1. Major advantage is liquidity—the Major advantage is liquidity—the ability of an asset to be converted ability of an asset to be converted into cash quicklyinto cash quickly

2.2. Tradeoff for high liquidity is lower Tradeoff for high liquidity is lower interestinterest

3.3. Usually has debit or ATM cardUsually has debit or ATM card

B.B. Certificate of Deposit (CD) or time Certificate of Deposit (CD) or time depositdeposit

1.1. Deposit that earns a fixed interest Deposit that earns a fixed interest rate for a specified length of time rate for a specified length of time

2.2. Requires minimum depositRequires minimum deposit

C.C. Money Market AccountMoney Market Account

1.1. Combination savings-investment plan Combination savings-investment plan in in which money deposited is used to which money deposited is used to purchase safe, liquid securitiespurchase safe, liquid securities2.2. Accounts with brokerage firms are not Accounts with brokerage firms are not

insured, some banks are (FDIC)insured, some banks are (FDIC)3.3. Generally considered safe because Generally considered safe because securities backing these funds are very securities backing these funds are very stablestable4.4. Interest rates vary with stock market, Interest rates vary with stock market, usually higher than savings accounts, usually higher than savings accounts, minimum deposit, restrict # of checks minimum deposit, restrict # of checks you can writeyou can write

II.II. Selecting a Savings PlanSelecting a Savings Plan—tradeoff between —tradeoff between liquidity, safety, yieldliquidity, safety, yield

A.A. LiquidityLiquidity

1.1. Keep some money in regular Keep some money in regular savings-- Can get it quickly, savings-- Can get it quickly, without penaltywithout penalty

2.2. CDs impose penalty if you CDs impose penalty if you withdraw earlywithdraw early

B.B. SafetySafety

1.1. Most insured by FDIC or Most insured by FDIC or NCUANCUA

2.2. Bank deposits almost always Bank deposits almost always safer that the stock marketsafer that the stock market

C.C. Convenience—location, drive-up Convenience—location, drive-up windows, ATMswindows, ATMs

D.D. Interest-Earning Potential—shop Interest-Earning Potential—shop around for best APYaround for best APY

E.E. Fees and Restrictions—be sure to Fees and Restrictions—be sure to understandunderstand

III.III. Saving RegularlySaving RegularlyA.A. Direct Deposit—paycheck directly Direct Deposit—paycheck directly

into bank, put some in savingsinto bank, put some in savings

B.B. Automatic Payroll DeductionsAutomatic Payroll Deductions

1.1. Have a certain amount Have a certain amount withheld from your paycheckwithheld from your paycheck

2.2. Payroll Savings PlansPayroll Savings Plans

The End!